Labor: 5 things to consider before drafting a noncompete agreement

As the economy begins to turn around and companies start to make more hiring decisions, employers may want to reform their existing noncompete agreements or to develop new agreements that contain post-employment restraints. However, before putting pen to paper, a number of factors should be considered in developing a noncompete agreement that will meet the needs of the company and also withstand judicial scrutiny. Accordingly, the following issues should be addressed when drafting or revising a noncompete agreement:

1. Identify what the company is trying to protect

In developing an agreement, the precise interests the company is trying to protect should be a key consideration. Without identifying and engaging in deep analysis regarding the protectable interests that justify the post-employment restraint, the company could diminish the likelihood of enforcing the agreement. In other words, does the business unit want to protect the company’s goodwill developed by the employee? Is the company trying to protect from interference with its existing customer base? Or is the company trying to protect its trade secrets and confidential information?

Depending on the type of interests the company wants to protect, nondisclosure and nonsolicitation of customers and/or employees might need to be incorporated, in addition to, or in lieu of, a true noncompete provision.

2. Determine the agreement format and execution

Noncompete agreements come in all shapes and sizes. Depending on the size of the company or the complexity of business operations, shorter agreements may be just as effective, or even preferable. Conversely, companies may need detailed and lengthy agreements in certain circumstances. In determining what the agreement will look like, companies should consider whether multiple stand-alone versions are better to accommodate state variations, or if the company is willing to reduce the chance of enforceability by reducing the number of variations. The format and length might also impact employee morale, recruiting and retention of employees—all important factors to be considered.

The company also should consider how the agreements will be executed. For example, will acknowledgements be secured by e-signature or traditional signature? If the company is looking at electronic acknowledgements, developing a plan for “proving up” the e-signature process (if litigation were to later arise) should be considered, which may include involving the company’s IT department.

3. Roll out the agreements

Once the agreements are drafted, there are a number of additional steps to be taken and decisions to be made. Many of these decisions will need to be vetted under state law to ensure certain actions can be taken in certain states. For example, will only new hires sign the agreements or will incumbent employees also sign? If the agreements are going to be presented to incumbent employees, additional issues should be addressed, as midstream rollouts may be tricky in some jurisdictions.

Another critical decision to be made before rolling out agreements involves determining whether or not the company will terminate employees who refuse to sign the agreements. Are the business unit leaders going to “buy in” to terminating for failure to sign or decline to hire individuals who refuse to sign? Resolving this issue at the outset will make these decisions less emotional and personal when a particular employee declines to sign the agreement.

Finally, the company should consider who is going to field questions from employees about the noncompete agreements. Those individuals should receive the proper training so that questions are addressed and answered in a uniform and effective way.

4. Research the best language to use

Once the component parts of the agreement have been decided upon, companies should conduct additional research. Is there a seminal case in the company’s particular industry or jurisdiction “blessing” particular language? Alternatively, is there a negative case suggesting that a noncompete in that particular industry would rarely be appropriate?

It also would be wise to research the company’s competitors. Have the competitors been involved in unfair competition litigation? How did their noncompete or nonsolicitation clause fare during the litigation? Is the competitor’s agreement similar to the agreement the company is considering? These types of issues may help persuade business unit leaders to understand why certain language should be adopted or avoided.

5. Manage risk

Finally, in assembling a noncompete agreement, the company should consider the end game. Does the company intend to devote the necessary resources (time and money) to litigate noncompliance of the agreement to deter others? If so, would the company benefit from a mandatory venue provision in the company’s home city or state? Or is the purpose to develop a flexible agreement that encourages employees to discuss their plans upon departure? If that is the goal, the noncompete agreement might contain an early resolution process that must be followed before any litigation ensues.

Conclusion

Just as attorneys would never advise the business unit to draft a noncompete agreement without consulting the legal department, attorneys should not draft these types of agreements without undertaking in-depth analysis with the business unit. These discussions are more likely to produce an agreement that accurately reflects the wants and needs of the company and that is more likely to be enforceable.